From Fedspeak to “Plain English”

To the surprise of no one, yesterday the Federal Reserve voted to raise interest rates.  Chair Powell, conducting his second FOMC press conference, was true to his reputation in giving direct, plainspoken answers to most questions. He described the economy as doing “very well”; and, when asked about the Fed’s natural rate of unemployment (known as the NAIRU in economics jargon), he replied the Fed “can’t be too attached to these unobservable variables,” rather than offer a long, technical explanation. Many of Powell’s answers affirmed his commitment to seeing to it that having the FOMC’s policy rate settings are data-driven.

One notable development was Powell’s announcement that, starting in January, all eight FOMC meetings will be followed by a press conference. Currently, the Fed Chair takes questions from the press only once per quarter, or after every other meeting.  Powell was quick to add that this change offered “no signal [for] policy rates,” and that it was being made only to improve communications.  However, those comments do not ring true. Since first lifting rates off their zero lower bound in December 2015, the FOMC has only raised rates during meetings that were followed by a press conference, also known as “live” meetings; and it’s now generally assumed that the FOMC will only adjust policy rates at a live meeting.  Internal pressure for adjusting this expectation was building. For example, new Atlanta Fed President and current FOMC voter Rafael Bostic considered the live meeting public expectation to be “a sign that what [the Fed is] doing right now isn’t working.” There were two options available that could convince the public and markets that policy rates could change at any meeting: one, the Fed could adjust rates at a meeting without a press conference or two, every FOMC meeting could be followed by a press conference. Chair Powell chose the second option.

A possible change that got only brief attention is that of having the Fed change its nominal policy target, which is currently a 2% inflation target. Although the FOMC discussed alternative targets late last year, Powell said that an actual change is neither on the calendar nor something he is looking at seriously right now.  Powell did nevertheless refer in his statement to “price level targeting and that sort of thing” as potential alternatives to the Fed’s current inflation target. (It’s not clear whether Powell sounded flippant because he didn’t think much of such alternatives or simply because he wanted to move onto the next question.) In my view a nominal GDP level target would be better than either the current inflation target or a price level target.